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Decentralizing Finance

sovereign fiat currencies to leverage the benefits of tokenizing currencies in terms

of a more efficient interbank settlement system (Mohamed, 2020). Such a legal-

tender central bank-issued digital currency is called a central bank digital currency

(CBDC), whose value is pegged to its sovereign fiat currency value.

13.4  FROM ICOS TO STOS

An ICO is an innovative form of raising capital or investments by issuing tokens

or alternative cryptocurrencies, that does not necessarily involve any equity being

acquired by the token buyers or investors. ICOs act to raise funds, whereby a com­

pany can raise money via tokenization of its business venture. Investors in ICOs are

typically speculators who expect the tokens to skyrocket in value and are therefore

only relying on the team behind the project to improve the value of the tokens.

Unfortunately, ICOs are often likened to stocks or shares in the venture. In effect,

many of the tokens issued are more like a utility to be exchanged for a product or

utilized as a service. Unlike stocks, ICOs do not grant the token-holder any right

to equity or profit-sharing of the company’s revenue. ICOs were a duplication of

the IPO (initial public offering) without having built the venture to a level of matu­

rity that would represent some form of substantial value from revenue performance.

Instead, they were meant to fast-track the venture’s ability to raise capital based just

on the strength of its idea and the team behind that idea. Needless to say, this raised

many concerns, especially in an unregulated environment.

Then, in 2018, after several mishaps and complaints, the SEC “delivered a rec­

ommendation (continuously updating) citing that every Coin Offerings are security

tokens. Numerous controllers trailed suit soon after, this led to the expansion of an

innovative form of Coin Offerings labelled the STOs or Security Token Offerings”

(SEC, 2019). Still utilizing the tokens issued as a representation of an investment,

the STO security token now signifies a “contract into a basic investment asset, like

stocks, funds and real estate investment trusts (REIT)” (see Figure 13.3). Like a typi­

cal security, it is a “fungible, accessible financial gadget which embraces a kind of

monetary value, or an investment product which is sponsored by a real-world asset

like a corporation” (SEC, 2019).

The additional requirements included that the venture must prove that it is viable

through proof of data, proof-of-concept (POC)/minimal viable product (MVP) or

prototype, and other elements like traction to show evidence of viability.

Unlike the ICO market, in which two-thirds of projects are futile or are found to

be scams, the STO market had advanced survival and success rates. The necessary

supervisory and lawfully enforceable necessities levied on STOs deterred entities

with duplicitous intentions from using the DeFi movement for their dishonest pur­

poses. Looking ahead, such steps are necessary if this channel of securitization is to

be an option for mainstream adoption.

Also, it is critical to distinguish between private securities and public securities. If

a token is considered and handled solely as a private security, in many jurisdictions,

there will be the possibility of using certain regulatory exemptions. In these cases,

the comprehensive IPO requirements will only come into force if a private token